Participation and Duration of Environmental Agreements: Investment Lags Matter

Abstract

This paper analyzes participation in international environmental agreements in a dynamic game in which countries pollute and invest in two types of clean technology that differ in investment lags. If investments are noncontractible, countries underinvest in the long-lag technology in the last period of the contract, which leads to a hold-up problem. Countries do not underinvest in the short-lag technology. If the short-lag technology is sufficiently cheap, the hold-up problem becomes irrelevant, and significant participation is not feasible. Our paper supplements Battaglini and Harstad, who point out that the hold-up problem may result in significant participation and even in the first-best outcome, and shows that the assumptions required for significant participation may be more limited than expected.